Macroeconomic Indicators: What They Are & How to Use Them презентация

Macroeconomic Indicators
Production: GDP, GNP, NI
Business Cycles
Inflation
Unemployment
Interest Rates

Quantity Aggregates
To understand the macroeconomy, we need to measure it. Chief measure of economy is the level of production
We need to combine the many goods produced or consumed in an economy into one measure.
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Gross Domestic Product (GDP)
GDP is the sum of the value of new, final goods produced within the domestic borders of an economy.
All goods sold in an economy share a common unit of measure: the price at which they are sold.
Final goods are goods sold to their end-users
Sum up the value of goods

Three Methods for Calculating GDP
Expenditure Method - The sum of the domestic spending on final goods (less domestic demand satisfied by imports).
Production Method - The value added created in all the sectors of the economy.
Income Method – The Wage, Rent, Interest and Profit Income generated by the domestic economy.

Expenditure Method

Japanese Expenditure

GNP vs. GDP
Net Factor Income [NFI] is income earned on overseas work or investments minus income generated domestically but paid to foreigners.

Compare Macau and the Philippines GDP or GNP
Macau produces a lot of profits paid to overseas owners of casinos.
Philippines workers earn a lot of income overseas.
Which is larger Philippines’ GDP or Philippines GNP?
Does Macau have greater GDP or GNP?

The main macroeconomic issues:
Inflation.
Employment and unemployment.
Stagflation and deflation.
Business cycles.
Economic growth.
The balance of payments and exchange rate.

1. Inflation
Inflation is the increase of prices over the period of time

Why prices increase?
Demand-pull inflation – this occurs when aggregate demand (AD) will be increasing faster than aggregate supply (LRAS).
Cost-push inflation – this occurs when there is a rise in the price of raw materials, higher taxes, e.t.c

Types of inflation by rate of increase
Creeping inflation (1-4%)
When the rate of inflation slowly increases over time. For example, the inflation rate rises from 2% to 3%, to 4% a year.
Walking inflation (2-10%)
When inflation is in single digits – less than 10%. At this rate – inflation is not a major problem, but when it rises over 4%, Central Banks will be increasingly concerned. Walking inflation may simply be referred to as moderate inflation.
Running inflation (10-20%)
When inflation starts to rise at a significant rate. It is usually defined as a rate between 10% and 20% a year. At this rate, inflation is imposing significant costs on the economy and could easily start to creep higher.
Galloping inflation (20%-1000%)
This is an inflation rate of between 20% up to 1000%. At this rapid rate of price increases, inflation is a serious problem and will be challenging to bring under control.
Hyperinflation (> 1000%)
This is reserved for extreme forms of inflation – usually over 1,000% though there is no specific definition. Hyperinflation usually involves prices changing so fast, that it becomes a daily occurrence, and under hyperinflation, the value of money will rapidly decline.

Comparing GDP levels across time
GDP measures the value of the goods produced by an economy by using the market price of each good to assign it a value.
Problem: Prices of goods in terms of money are changing overtime making comparisons in overall value difficult.
Bias: Money prices are growing over time as money supply grows.
Solution: Choose a Base Year’s prices as a fixed yardstick of value for different goods.

Real GDP: Yt
GDP or Nominal GDP or Current Dollar GDP is the weighted sum of the number of goods produced using their current prices as the weight.
Real GDP or Constant Dollar GDP or GDP adjusted for inflation is the weighted sum of the number of goods produces using the Base Year prices as yardsticks.

Solved Problem
Real GDP: 2021 (2020 Base Year)

Price Indices: Pt
Two most commonly used price indices are GDP Deflator and Consumer Price Index (CPI)
The GDP deflator is the ratio of nominal GDP to Real GDP (multiplied by 100).

Consumer Price Index
The CPI is the price of a representative market basket of goods relative to the price of that same basket during a benchmark/base year (multiplied by 100).

Q: What is Inflation?
A: The Growth Rate of Price Level
Inflation: prices are growing
Disinflation: inflation is slowing down but still positive
Deflation: inflation is negative and prices are actually dropping.

Adjusting for Inflation
We can use some price index to “adjust for inflation” effectively converting a variable measured in money (nominal) into a variable measured in the prices of some reference year.
Real series measures the value of goods that could have been purchased with that amount of money in the reference year.

Converting Current Price Series into Constant Price Series
Series to be adjusted for inflation: Nt
Contemporaneous price level (Pt) and comparable price level in reference year (PRef)
Series adjusted for inflation – (i.e. how much that the goods that you could have bought with N in year t would cost in year Ref.)

Housing Price: Hong Kong Island
Compare the price of housing in HK average price of an apartment on HK Island with an area between 100m2 and 160m2
in December 2005 : HK$112,012/m2
in December 1982: HK$14,742/m2
How much did an apartment cost back then when expressed in today’s dollars?

Housing Price: Hong Kong Island
The Hong Kong CPI (2000=100) was 35.5 in December 1982 and 94.5 in December 2005.
Calculate:
In real, terms, housing today is almost 3 times as expensive as in 1982!

Example
Compare the box office take of “Shrek 2” and “Sound of Music” in 2004 dollars.

Interest Rates

What are some major interest rates in financial markets? Be as specific as possible.

Nominal and Real Interest Rates
Nominal return represents how much money you will receive after 1 year for giving up 1 dollar of money today
Real return represents how many goods you can buy if you give up the opportunity to buy 1 good today.
Nominal interest rate is money interest rate. Real interest rate is goods interest rate.

Imagine a 1 year loan [T =1]: The lender gives up some goods to make a loan and will buy goods in the future with the repayment.
If the price of goods at time t is Pt, the foregone current goods are
The goods value of the future repayment is

Real Interest Rate
The real interest rate on the loan is defined as the future goods received relative to current goods foregone

Ex Ante Rate and the Fisher Effect
Savings and investment decisions must be made before future inflation is known so they must be made on the basis of an ex ante (predicted) real interest rate.
Fisher Hypothesis: Ex ante real interest rate is determined by forces in the financial market. Money interest rate is just the real ex ante rate plus the market’s consensus forecast of inflation.

Economic growth

Recessions and Expansions
Business cycle positions are sometimes characterized as booms and recessions.
These names have many definitions
An expansion occurs roughly when real GDP is above the trend growth path (detrended output is positive).
A recession occurs roughly when real GDP is below trend growth.
In the USA, recessions are sometimes defined as 2 consecutive periods of negative growth.

Stock Market tends to co-move positively with the business cycle.